Prop 17 - increased auto insurance competition or hidden surcharges?

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It’s not the most scintillating measure on the June 8 ballot, but Proposition 17 is about something many Californians consider fundamental: auto insurance. The proposition would allow insurance companies to offer the same discount they give to customers who’ve stuck with them awhile to new customers who switch from another insurer.

Under current state law, drivers who’ve maintained insurance with the same company for a while are eligible for a continuous coverage — or “persistency” — discount. But when the customer wants to change companies, the new insurer can’t offer that discount. Proponents of Prop 17 say the measure would fix that.

"This flaw really punishes the 82 percent of responsible drivers who maintain auto insurance," Mike D'Arelli, the Executive Director of the Alliance of Insurance Agents & Brokers recently told Larry Mantle on AirTalk. He says that current law restricts customers from shopping around.

"We love Prop 17 because it’s gonna allow us to really face companies off against each other and increase competition, leading to lower rates," D'Arelli says.

Insurance companies and business groups also love Prop 17. Television ads in support of the measure say it could save drivers up to $250 a year on insurance.

But opponents of the ballot measure say somebody’s going to pay to offset those discounts, and it’ll be the consumers who’ve dropped their auto insurance — even good drivers who’ve done so for good reasons. They argue that Prop 17 would allow insurance companies to raise premiums as much as a $1,000 a year on those customers.

"Think about it, when was the last time an insurance company spent $10 million to put a proposition on the ballot to save you money? The answer is — it hasn’t happened," says Harvey Rosenfield, who founded Consumer Watchdog. Along with other consumer advocacy groups, it opposes Prop 17.

The insurance company Rosenfield’s talking about is Mercury Insurance, Prop 17’s primary backer. Rosenfield points out that the California Department of Insurance found the company in violation of its rules because it imposed surcharges on consumers.

He says Prop 17 is just Mercury’s campaign to make those surcharges legal. So, Rosenfield says, people who’ve dropped their auto insurance — to serve in the military or go to school out of state, to save money or because of illness — should beware.

"All of these people would be surcharged under Proposition 17. Their premiums would go up. It would be unaffordable for even more people, which in turn would lead to even more uninsured motorists on the road.," says Rosenfield.

The proposition establishes a 90-day grace period for lapsed customers to be reinstated with the continuous coverage discount. Its proponents say it mandates that insurers consider military personnel serving abroad as “continuously covered.”

If Prop 17 passes, it’s sure to shake up a California industry in which companies collected nearly $19.7 billion in auto insurance premiums in 2008.